INCOME TAX ACT, 1961

--Business deduction under section 36(1)(vii)--Bad-debts Establishment of debts as Bad--The assessee has written off in the books of account certain sums as bad debts in respect of eight parties the details of which are given in Para 5.1 of the Commissioner (Appeals)'s order. Before the assessing officer, it was contended that the reasons for non recovery of the amounts from the clients were that :- (i) fee claim raised for additional work not covered in the original fee agreement; (ii) re-negotiation over agreed fees by clients; (iii) non-acceptance/part acceptance of deliverables by the client; and (iv) differences over quantum and quality of deliverables. Further, these amounts have been written off only after making the required efforts for recovery. The management ultimately was of the view that legal recourse could not be in the interest of the company. With respect to the allowability of claims of bad debt, it was submitted that firstly, it has complied with requisite condition that the fee amount disclosed as bad debts have been considered as income of the previous years in which the respective invoices were raised and secondly, the company has disclosed the debts as irrecoverable and written off as bad debts in the books of account of the previous year ended 31-3-2001. Assessing officer did not agree with the contention of the assessee had held that the assessee cannot write-off any amount arbitrarily or irrationally. The write-off has to be bona fide and reasonable. He held that even after the amendment the basic condition relating to establishing the debt as bad is still effective. He, thus, disallowed the claim of bad debts amounting to Rs. 12,18,732. Commissioner (Appeals) too rejected the explanation of the assessee. and held that the assessee has not brought on record the necessary evidence to show that its claim of writing off the debt as bad debt was an objective of a bona fide belief. He, thus, upheld the disallowance. Held: After the amendment w.e.f. 1-4-1989, it is sufficient that the assessee has written off the bad debts in the account and the same has to be allowed. This issue has now been set at rest by the decision of the Supreme Court in the case of T.R.F. Limited v. CIT 2010 TaxPub(DT) 1481 (SC) : (2010) 323 ITR 397 (SC), wherein the Supreme has held that after 1-4-1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debts is written off as irrecoverable in the accounts of the assessee. Thus, following the law settled by the Supreme Court in the aforesaid case, the claim of bad debts is allowable as bad debts and the findings of the Commissioner (Appeals) on this score is set aside.